What is the Best Way to Leave an Inheritance to My Adult Children?

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How to Leave an Inheritance to My Adult Children

Many clients begin the estate planning process assuming that upon their death they will leave assets to their children. The norm is as an “outright” distribution. Parents are often reluctant to leave assets in trust for adult children. They don’t want to be seen as overly controlling. In addition, relatively few professional advisors promote the many advantages a trust offers. A protective trust may provide advantages to an adult child. Leaving assets in trust for an adult child doesn’t mean that they lose control of the assets. To the contrary, the child is appointed as a trustee over their own trust. At that point, they have both control over the trust assets and can receive critical protections.

Best Way to Leave an Inheritance

There are many ways to leave an inheritance to your children. For instance, you can provide for assets to be held in a trust with staggered distributions. This can be based on your guess of when your child will be mature enough to make good financial decisions. You could provide for a distribution of one-third of the trust assets upon the child attaining the age of 35. Then, one-half of the remaining trust assets upon the child attaining age 45. The balance would be given upon the child attaining the age of 55. This would provide the child with protection of undistributed assets. It also allows a portion of the trust to terminate at given age intervals. Of course, that would still result in outright distributions at each of those times. That portion of the inheritance would no longer be protected.

Alternatively, you could provide for your assets to be distributed to your children in continuing lifetime trusts. These trusts will last for the duration of the child’s lifetime. A lifetime trust provides ongoing protection of the child’s inheritance. This covers them from lawsuits, divorces, and immature or fiscally irresponsible behavior. Within each child’s trust, you can carve out individual distribution guidelines. These guidelines provide for the manner of distributions in accordance with your values, goals and beliefs. For example, if you wish to encourage entrepreneurship. You can provide that the Trustee will distribute funds to provide for the start-up costs of a new business or professional practice. By doing so, you will encourage an entrepreneurial spirit while also providing opportunities.

You may also wish to divide your property based on the individual needs and wants of each child. For example, a child who has been employed in a family business for years may be the most suitable person to take over the business. The estate plan can provide for this child to receive the family business. It will include language making an equalizing distribution of other assets to other children, who have no interest in the family business.

Know Your State’s Laws

Depending on state law, you can also give your child the power to determine who will inherit any remaining trust property upon the child’s death. The ability of a beneficiary (your child) to determine who ultimately gets any remaining trust property is called a “power of appointment.” This power to “rewrite” your estate plan can be very limited (i .e., your child can leave the property only to your descendants) or can very broad (allowing your child to leave the property to any person, whether inside or outside of your bloodline). Granting a power of appointment to a beneficiary may have estate tax consequences, so you always want to receive advice from your professional advisors on this strategy.